Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Thursday, January 6, 2011

NATIONAL TAXPAYER ADVOCATE’S REPORT TO CONGRESS

Yesterday (January 5th) National Taxpayer Advocate Nina E. Olson released her 10th annual report to Congress (click here), identifying the need for tax reform as the number one priority in tax administration.

Federal law requires the National Taxpayer Advocate to submit an Annual Report to Congress that identifies at least 20 of the most serious problems encountered by taxpayers and makes administrative and legislative recommendations to mitigate those problems. Overall, this year’s report identifies 21 problems, provides updates on four previously identified issues, makes dozens of recommendations for administrative change, proposes 11 recommendations for legislative change, and analyzes the 10 tax issues most frequently litigated in the federal courts

Nina adds her voice to that of many others lately, myself included, by stating –

“The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue Code.”

She goes on to explain –

“Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit.”

Nina suggests –

“The most prominent approach would involve reducing tax preferences (often referred to as “broadening the tax base”) in exchange for lower rates.”

And warns –

“If tax preferences are to be eliminated in order to reduce tax rates, we cannot pretend that broadening the tax base means eliminating someone else’s tax break while preserving our own. Everything must be put on the table, and we must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue neutral basis, however, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.”

The #2 problem presented by Nina concerns the Service’s “Increasing Responsibilities for Administering Social Benefit Programs” like the Earned Income Credit.

In discussing this situation Nina says -

“Running social programs through the tax system is beneficial in several respects {FYI, I do not at all agree – rdf}. These benefits include the potential ability to reduce the burden of the application process (via return filing), direct access by the administrator to eligibility data relating to income, and the relative efficiency of the IRS as a payment processor. The benefits also come with a cost to both the IRS and taxpayers. As discussed in detail below, Code-based social programs can undermine the IRS’s ability to perform its core function of collecting taxes. Further, the current enforcement culture of the the IRS may not be optimal for the administration of social benefits.”

I find it odd that advocates of simplifying the tax code so often support the repeal of the AMT. The AMT is a much simpler tax than the regular tax code. Instead of repealing the AMT and simplifying the regular tax code, a better start would be repealing the regular tax code and then simplifying the AMT.

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